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Business LibreTexts

11.6: Summary

  • Page ID
    12029
  • Section Summaries

    9.1 Differentiate between Centralized and Decentralized Management

    • Management control systems allow managers to develop a reporting structure to help the organization meet its strategic goals.
    • In centralized organizations, primary decisions are made by the person or persons at the top of the organization.
    • Decentralized organizations delegate decision-making authority throughout the organization.
    • Daily decision-making involves frequent and immediate decisions.
    • Strategic decision-making involves infrequent and long-term decisions.

    9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments

    • Segments are uniquely identifiable components of the business that facilitate the effective and efficient operation of the business.
    • Organizational charts are used to graphically represent the authority structure of an organization.
    • The CEO of a centralized organization will establish the strategy and make decisions that will be implemented throughout the organization.
    • The CEO of a decentralized organization will establish strategic goals and empower managers to achieve the goals.

    9.3 Describe the Types of Responsibility Centers

    • A responsibility accounting structure helps management evaluate the financial performance of the segments in the organization.
    • Responsibility centers are segments within a responsibility accounting structure.
    • Five types of responsibility centers include cost centers, discretionary cost centers, revenue centers, profit centers, and investment centers.
    • Cost centers are responsibility centers that focus only on expenses.
    • Discretionary cost centers are responsibility centers that focus only on controllable expenses.
    • Revenue centers are responsibility centers that focus on revenues.
    • Profit centers are responsibility centers that focus on revenues and expenses.
    • Investment centers are responsibility centers that consider the investments made by the responsibility center.
    • Return on investment is a particular type of investment center structure that calculates a responsibility center’s profit percentage relative to the center’s investment.
    • Residual income is a particular type of investment center structure that evaluates investments using a common cost of capital rate amongst all responsibility centers.

    9.4 Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers

    • Uncontrollable costs are costs that management or an organization has little or no ability to influence.
    • Controllable costs are costs that managers or an organization can influence.
    • Managers in a responsibility accounting structure should only be evaluated based on controllable costs.
    • Businesses with segments that provide goods to other segments within the business often use a transfer pricing structure to record the transaction.
    • The general transfer pricing model considers the opportunity costs involved in selling to internal rather than external customers. This method is difficult to implement and businesses often choose other methods.
    • The market price model uses market prices that would be used for external customers as the basis for internal transfers.
    • The cost approach uses the company’s cost to make the product as the basis for establishing the transfer price.
    • The negotiated model allows the selling and buying segments within the business to determine the transfer price.
    • Transfer price arrangements are more difficult in international businesses because of complexities related to taxes, duties, and currency fluctuations.

    Key Terms

    allocated costs
    costs that are generated by non–revenue generating portions of the business, such as corporate headquarters, that are assigned based on some formula to the revenue generating portions of the business
    centralization
    business structure in which one individual makes the important decisions and provides the primary strategic direction for the company
    controllable costs
    those that a company or manager can influence
    cost approach
    transfer pricing structure in which the transfer price may be based on total variable cost, full cost, or a cost-plus scenario, calculated by adding a markup to either variable cost or full cost
    cost center
    organizational segment in which a manager is held responsible only for costs
    decentralization
    business structure in which the decision-making is made at various levels of the organization
    discretionary cost center
    organizational segment in which a manager is held responsible only for controllable costs when there is not a well-defined relationship between the center’s costs and its services or products
    goal congruence
    integration of multiple goals, either within an organization or across multiple components or entities; congruence is achieved by aligning goals to achieve an anticipated mission
    investment center
    organizational segment in which a manager is accountable for profits (revenues minus expenses) and the invested capital used by the segment
    lower-level management
    level of management that provides basic supervision and oversight for the operations of the organization
    management control system
    structure within an organization that allows managers to establish, implement, and monitor progress toward the strategic goals of the organization
    market price approach
    transfer pricing structure in which the transfer price is based on the price the seller would use for an outside customer
    mid-level management
    level of management that receives direction from upper management and supervises and provides direction to lower-level management
    negotiated price approach
    transfer pricing structure in which the transfer price is based on negotiations between the buying segment and the selling segment
    organizational chart
    graphical representations illustrating the authority for decision-making and oversight throughout an organization
    profit center
    organizational segment in which a manager is responsible for and evaluted on both revenues and costs
    residual income (RI)
    amount of income a given division (or project) is expected to earn in excess of a firm’s minimum return goal
    responsibility accounting
    method of encouraging goal congruence by setting and communicating the financial performance measures by which managers will be evaluated
    responsibility centers
    segments in which supervisors or managers have responsibility for the performance of the center and the authority to make decisions that affect the center
    return on investment (ROI)
    measure of the percentage of income generated by profits that were invested in capital assets
    revenue center
    part of an organization in which management is evaluated based on the ability to generate revenues; the manager's primary control is only revenues
    segment
    portion of the business that management believes has sufficient similarities in product lines, geographic locations, or customers to warrant reporting that portion of the company as a distinct part of the entire company
    transfer pricing
    pricing structure used when one segment of a business “sells” goods to another segment of the same business
    uncontrollable costs
    those that an organization or manager has little or no ability to influence
    upper management
    level of management that consists of the board of directors and chief executives charged with providing strategic guidance for the organization